Opaque Selling and Inventory Management in Vertically Differentiated Markets

Abstract

Problem definition: We study the emerging practice of using opaque selling to dispose of leftover inventory in vertically differentiated markets. With this selling strategy, a firm offers a synthetic product (after the regular selling season) for which consumers do not know the exact identity until after purchase. Academic/practical relevance: This opaque selling strategy is implemented in several industries, e.g., travel and retail. However, its mechanisms are yet to be fully understood as the extant literature considers other settings wherein opaque selling’s mechanisms do not carry over to ours. Methodology: We develop a game-theoretic model featuring a firm’s inventory and dynamic selling strategies and consumers’ strategic waiting. We characterize the optimal inventory levels, product offerings, and prices. Results: We find that, compared to last-minute selling (i.e., selling leftover inventory separately), opaque selling increases regular-season profits by softening inter-temporal cannibalization from sales-season products to high-quality products sold in the regular season. However, it may decrease sales-season profits as products with different qualities are probabilistically allocated to all purchasing consumers, irrespective of their valuations. We further demonstrate that these mechanisms are fundamentally different from those identified in the literature for other settings, and this contrast generates opposite recommendations as for the optimal usage of opaque selling. With endogenous inventory, interestingly, opaque selling is even more attractive and it prompts the firm to procure fewer high-quality products than under last-minute selling. Managerial implications: We demonstrate the value of opaque selling as an inventory clearance strategy in vertical markets. We show that a firm can further strengthen its profitability by combining opaque selling with inventory management. We also provide guidelines on managing inventory and illustrate the non-trivial impact of opaque selling.

Keywords: probabilistic goods; opaque selling; strategic consumers; vertically differentiated products; revenue management